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Zillow Says Negative Equity More Widespread Than Previously Thought

By Robbie Whelan, WSJ Blogs

For the last year or so, real-estate listing and valuation service Zillow has been overhauling its methodology for determining how many homes out there are “under water,” meaning their owners owe more in mortgage debt to lenders than the value of their properties.

Today, it rolls out its new negative equity report, which shows, among other things, that nearly 16 million U.S. homeowners, or 31.4% of all homeowners with a mortgage, were under water in 2012. They owe $1.2 trillion more than the value of their homes.

And though the negative equity share has fallen since last year’s tally of 32.4% (Zillow also revised its data based on the new methodology going back five quarters), it’s still higher than previous negative equity estimates, including the most-commonly cited one, from mortgage-data firm CoreLogic.

In March, CoreLogic estimated that 11.1 million homeowners – or 22.8% of homes with a mortgage – were under water, and that they owed $715 billion more than their homes are worth.

Stan Humphries, Zillow’s chief economist, says that his company’s new methodology presents a much more complete picture of the negative equity picture. Instead of using data based on public records of home loans, as other forecasters of the underwater problem have, Zillow has partnered with credit rating agency TransUnion to estimate the total amount of outstanding mortgage debt.

The difference, Zillow says, is that the credit agencies better capture how much of second-mortgage loans like home equity lines of credit have been paid down, while public records only capture the value of a loan at the time it was made, forcing analysts to estimate outstanding mortgage balances based on credit trends. Zillow’s new methodology also covers a universe of some 35 million loans, a wider swath of the mortgage market .

The upshot is that, although negative equity levels are falling, the problem remains daunting.

“It’s a $1.2 trillion problem,” Mr. Humphries says. “We think 2012 is going to be a great year for home sales, but a mixed picture for prices. People need to steel themselves for a long bottom. It’s not going to be a V-shaped recovery, because negative equity is going to challenge the market for a while.”

Zillow also attributes the stubbornly high level of negative equity to slowness over the last year and a half in the foreclosure process. When a home goes into foreclosure and a bank repossesses it, the negative equity in those homes is wiped out, taking those homeowners out of the “underwater” pool.

Other findings included the fact that most underwater borrowers are not stuck in the deep end. Of underwater borrowers, nearly 40% owe between 1% and 20% more than their homes are worth. The worst negative equity percentages were in Arizona, Georgia, Florida and Michigan, the report found.

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